This credit-card insurance is a huge con. We reveal the rip-offs and the Best Buys, which could knock £240+ a year off your bill.
Of all the financial products currently available in the UK, I nominate payment protection insurance (PPI) as the biggest rip-off.
Payment protection insurance is optional protection which is sold to customers arranging personal loans, credit and store cards, mortgages, hire-purchase agreements, etc. If you fall ill, have an accident or lose your job, PPI meets your monthly repayments until you return to work, usually for no more than a year. Some policies, including those covering cards and loans, also include life insurance to pay off your debt if you die.
Earlier this year, one financial firm asked me to write a "warts and all" exposé of PPI, because I worked in this industry for more than a decade before becoming a financial writer, and am now one of its main critics. Here's what my report revealed:
- Thanks to our growing addiction to debt, yearly PPI premiums have tripled in eight years, rising from £2 billion in 1998 to £6 billion today. This consists of £4 billion from personal loan protection, £1 billion from mortgage payment protection and £1 billion from credit card repayment protection.
- Of this sum, no more than £1 billion will be returned to policyholders as payouts, leaving £5 billion to be shared among lenders (who take the lion's share) and insurers. Indeed, while PPI claims have been falling in recent years, premium rates have been rising, making PPI profits even higher.
- Almost all PPI policies (more than 95%) are arranged by, and controlled by, lenders, which stifles competition, holds consumers captive, and keeps the cost of PPI artificially high. Indeed, lenders charge as much as they can for this cover, which is why profit margins usually exceed 80%-90%.
- The PPI problem is huge, with perhaps 28 million policies in existence, or almost one for every working person in the UK.
For the record, I've criticised PPI more than five hundred times in my 3½ years as a financial writer, and it's the turn of credit card repayment protection (CCRP) today!
By my reckoning, around a fifth of our total credit-card debt of £66.5 billion is protected by CCRP. This will generate premiums totalling £1 billion this year, the majority of which will be immediately trousered by card issuers.
In order to show you just how over-priced this protection is, I asked independent financial researcher Moneyfacts (which powers the Fool's search engines for credit cards, personal loans, mortgages, savings accounts, etc.) to provide me with the cost of CCRP across all 297 credit cards in its database. Here's what my number-crunching revealed:
The outrageous cost of credit card repayment protection
Monthly cost | Number of |
|---|---|
0.45 | 3 |
0.59 | 5 |
0.67 | 1 |
0.70 | 12 |
0.72 | 58 |
0.74 | 7 |
0.75 | 7 |
0.76 | 70 |
0.77 | 6 |
0.78 | 47 |
0.79 | 52 |
0.85 | 4 |
0.89 | 1 |
0.95 | 1 |
0.99 | 2 |
1.00 | 4 |
1.30 | 1 |
1.50 | 16 |
Average: 0.80 | Total: 297 cards |
Source: Moneyfacts, 25/07/06
As you can see, the average cost of this protection is 0.8% of your statement balance per month, although premium rates range from the modest 0.45% charged by the Post Office to the frankly ludicrous 1.5% levied by many store-card issuers! Thus, on average, CCRP costs £40 a month, or £480 a year, to protect a balance of £5,000. With a Best Buy policy (see below), this cost could be halved, saving £240 a year in this example.
Now for more bad news: even if you're a full payer (someone who always pays off their monthly credit-card bill in full), you still pay the same CCRP premium as "revolvers" (those people who always carry a balance on their cards). Ouch!
To be blunt, CCRP can hardly be considered "insurance" at all, since you're almost guaranteed to lose money on this rip-off cover. Indeed, the Citizens Advice Bureau's report last year called PPI a "protection racket", and this market is presently under investigation by both the Office of Fair Trading and the Financial Services Authority.
In summary, why pay twice as much as you should for this protection? With five to ten minutes' effort, you could save £240 a year, so don't delay -- ditch and switch your PPI today! Best Buy providers of stand-alone PPI policies (accident, sickness and unemployment cover) include Best Insurance, British Insurance, Burgesses, Helpupay, Paymentcare, mortgageprotect and the Post Office.
PS: The Office of Fair Trading today published an interim report as part of its investigation into PPI, which reads like a horror story! You can check it out here.
More: Lower your bills with these 0% credit cards, low-cost personal loans and bargain mortgages!
Disclosure: Cliff has previously acted as a paid consultant to Post Office Financial Services.